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Navigating the Impacts of Inflation on the Retail Industry

Inflation has presented a serious issue for retailers throughout the last year. Increased costs may mean lower profit margins if in-store prices are not raised, but raising prices could push loyal customers away. Sustained high prices are also squeezing shoppers’ wallets as household expenditures rise and customers must prioritize “essential” items like food or gas rather than that new outfit or pair of shoes. This is a dilemma that will stick around for at least the next few months as the U.S. Federal Reserve System (Fed) grapples with interest rates. Below, we explore considerations for navigating the impacts of inflation on the retail industry.

Understanding The Shopper Mindset 

Shoppers are certainly more price sensitive than they have been in recent years. This is because the cost of basic necessities has shot through the roof. Gas, for example, is an American family’s second-highest expense and its price has risen roughly 60% in the past year alone. As prices remain high for longer, shoppers may think twice about buying new products that are not absolute priorities. 

These costs work in tandem with another concerning statistic: record-high consumer debt. The most recent data shows that total household debt rose nearly $400 billion at the end of 2022 alone. This is partially on credit, as credit card balances have risen over $60 billion in the same period. Thus, Americans’ savings have been stretched thin and more people are relying on debt to get by. 

This is all to say that higher prices and lower savings have squeezed American wallets. If the economy continues to forecast a recession, shoppers may sharply pull back spending without warning. This is worrisome for retailers who struggle to predict earnings and plan product lineups in the coming months.  

What is certain, however, is that shoppers will push harder to save money. This means spending more time searching for the best deals, both online and in-person, including secondhand retail options. As a result, many are willing to break brand loyalty to stretch budgets further. 

Establishing a Pricing Strategy 

With brand loyalty playing less of a role in the mindset of shoppers, retailers need to focus on winning new customers and retaining those they currently have. Much of this begins with strategizing prices. 

While retailers are also stretched thin because of increased costs, it’s paramount not to raise in-store prices the wrong way. Sweeping price raises across all product categories can push even the most loyal shoppers away. Consequently, retailers should target the most price-resilient customers first alongside products with the highest margins. 

One avenue to target these resilient consumers is through luxury goods, which often cater to households with extra discretionary income. These shoppers are less likely to stop spending for a slight rise in price. For example, those who make more than $100k are 10% more likely to remain loyal to their favorite brands than those who don’t. 

To retain more price-sensitive customers, retailers should maintain prices on common items. Products like socks, plastic utensils, and toilet paper should maintain their prices because they’re more visible. As such, shoppers often benchmark their feelings about a store’s prices based on them. Furthermore, they’re more easily replaced with items from competitors.   

Another avenue that’s worth exploring is the rise of Buy Now, Pay Later (BNPL). Typically a short-term loan with no interest, BNPL allows shoppers to spread payments over longer periods. This helps retain customer spending even if they don’t have cash in hand. While there are some risks associated with BNPL, many stores have opted to include their own form of the option to spur spending. Retailers that believe they could generate more sales and lasting loyalty from BNPL should make investments in the space.  

Cutting Operating Costs 

Finally, high interest rates and inflation have significantly raised operating costs for many retailers. It goes without saying that costs should be effectively managed, especially if the economy tips into a recession. This may mean changing labor allocation by hiring more part-time staff, but there are also other solutions that are becoming common. 

Utilizing Automated Intelligence (AI) to automate store processes can help save costs over time by reducing human error, strategizing inventory, improving task management, and optimizing product lineups. This helps retailers better manage demand cycles and bring in shoppers. Other forms of automation like self-checkouts can also help cut down on employee expenses.  

Looking Ahead 

Whether inflation continues to remain stubborn or drops significantly as a result of the Fed’s actions, retailers need to prepare. This means strategizing pricing and inventory, saving on costs, and continually staying up to date on the latest inflation data. The retailers that best understand shopper sentiments will be more likely to maintain demand and the loyalty of their customers. To learn more about some of the emerging topics and trends in the retail industry, connect with one of our retail experts today. 

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Contributions from Jake Park-Walters 

Tags: Pricing Strategy, Retail Planning and Execution, Retail Trends